Luxury's Enviable Headache: What to Do With $22 Billion in Cash

(Bloomberg) -- For Europe’s luxury giants, it’s a nice dilemma to have: What to do with all that cash.

French companies LVMH, Kering and Hermes International, along with Switzerland’s Richemont, had collectively amassed a 17.4-billion-euro ($21.5 billion) cash pile by the end of 2017. More is rolling in, as sales boom in China and a new generation of designers creates buzz with younger shoppers. Just this week LVMH reported that first-quarter organic sales surged a greater-than-expected 13 percent.

Luxury's Enviable Headache: What to Do With $22 Billion in Cash

“They can’t park this cash; they have to do something with it," said Ashok Som, co-director of a luxury management program run by France’s Essec Business School and Italy’s SDA Bocconi School of Management. Something -- but what?

Hermes is paying a special dividend to shareholders totaling about 528 million euros, while Richemont is spending about 2.7 billion euros to take control of online retailer Yoox Net-a-Porter SpA. Yet those transactions will make relatively small dents in the companies’ cash piles.

Splashing out on acquisitions is an option, but not many attractive targets are available. The big luxury groups would love to get their hands on closely held Chanel, for example, but its owners show no interest in selling. LVMH was firmly rebuffed when it tried to mount a stealth takeover of Hermes. Over the past year, the big groups passed on chances to acquire watchmaker Breitling, shoe company Jimmy Choo Group Ltd. and Jeanne Lanvin SAS, France’s oldest couture house.

Luxury's Enviable Headache: What to Do With $22 Billion in Cash

Outside-the-box acquisitions haven’t worked well. Kering, the owner of Gucci and Saint Laurent, tried to marry luxury with sports by buying sneaker maker Puma and skateboarding brand Volcom a few years ago. It’s now getting rid of both.

There are still plenty of takeover opportunities among smaller luxury companies. Global No. 1 LVMH, though, already owns some 70 luxury brands. Adding another shoemaker or watchmaker wouldn’t move the needle much -- especially since LVMH gets about half its profits from its star Louis Vuitton brand.

There are a couple of potential targets lurking out there that would soak up a lot of cash.

British trench-coat maker Burberry Group Plc, with a market value of about 7.1 billion pounds ($10.1 billion) has been the subject of recurrent takeover speculation as it relaunches under a new designer and CEO -- speculation fueled in part by a growing stake held by Bernard Arnault’s friend and business associate, the Belgian billionaire Albert Frere.

And U.S. jewelry retailer Tiffany & Co., with a market value of about $12 billion, could attract a takeover offer from European companies, analysts at Citigroup Inc. wrote in December.

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